There inevitably comes a time as you’re building a construction business when the equipment you have just isn’t cutting it anymore. Maybe your excavator keeps having gearbox issues, or you need more skid loaders to meet demand. Either way, it may be tempting to head straight to the dealership, but it’s worth asking a couple of questions first.
Big capital investment decisions like buying or renting a new piece of equipment can either make you money in the long-term, or be a costly drain on your business. Doing a little bit of homework before you pull out your wallet will make it easier to choose the right move for your company’s financial health.
Key Takeaways
- There’s no one-size-fits-all approach to making solid capital investment decisions. Instead of just going with your gut though, weigh your options based on your company’s goals and current cash flow.
- When thinking about renting vs. buying, consider utilization, monthly payments, and efficiency gains.
- Taxes are what they are. Worry less about tax implications and more about what makes sense for your business.
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The Most Important Step - Check on Your Cash Flow
Good business decisions are rarely made on the fly. Before you put any money down on a new piece of equipment, ask yourself what goals you want to achieve. Start with these three questions:
- Where do you want to take your business over the next 5-10 years?
- What kind of cash flow do you need to achieve those goals?
- What does your cash flow look like today?
There’s no one right answer here. But, depending on what you’re trying to accomplish, I have some general recommendations.
If cash flow is tight and carefully managing it is your top priority, it makes the most sense to choose the option that’s most favorable from a monthly cash flow perspective, even if it's more expensive in the long run. If cash flow is strong and you have tons of cash in the bank, think about how you can acquire a new piece of equipment in the most cost-effective way. This might not be the best for cash flow in the short-term, but will lower the cost of owning that equipment in the long-term. The right decision is the one that’s the best fit for your company’s goals.
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When in doubt, circle back to your company plan. What timeline are you working with, and how will your decision speed those up or slow them down?
Should I Rent or Should I Buy?
Your number one consideration when choosing to rent or buy a piece of equipment should be your utilization rate. There’s a big difference between renting a skid loader twice a year to meet a seasonal gap vs. renting several every month because you have more work than your current equipment can service. In the latter case, it probably makes more sense to buy, but it’s always worth double checking your cash flow first.
In this example, you might ask yourself:
- What’s the cashflow burden to rent 3 skidloaders every month?
- If you’re paying $10k a month to rent, could you make a $10k monthly payment on a skid loader to meet that need instead?
- Will you gain any efficiency owning the equipment compared to coordinating rentals every month?
- If you choose to buy, what type of financing would be best from a cash standpoint? Or, does it make the most sense to pay in full with cash?
Even if you’re feeling the pressure to buy now, taking the time to ask these questions is crucial.
What About Tax Considerations?
A lot of people ask me if they should be factoring in tax breaks when thinking through capital investment decisions. I always say the same thing: Stop worrying so much about taxes.
At the end of the day, make the decision that's best for your company - not the decision that has the most favorable tax impact. And no, those aren't always the same thing.
You can only save so much in taxes each year (and you should only focus on that after you’ve built a stable, profitable, and growing business). Your effort is much better spent making money than trying to save a buck on taxes. This doesn’t mean you shouldn’t take obvious tax wins when they’re available, of course. Just don’t over focus on reducing taxes, because it’ll take your focus away from more important things.
Wrapping Up
Ultimately, I can’t tell you what kind of capital investment decisions are best for your business - your cash flow numbers can. Once you’re dialed in, you can decide what will get you closest to both your short and long-term goals.
Check out CrewCost's construction accounting software to stay on top of your numbers.
Connect with Luke at Cruzumi CFO & Advisory